Coal seam gas big winner in tax deal

Australia’s budding $50 billion coal- seam gas industry is set to emerge as the key winner from the resources tax compromise expected to be ­announced as early as today.

Prime Minister Julia Gillard will be in Queensland, where four major coal-seam gas-fed liquefied natural gas projects are planned.

There are expectations that the government has struck a deal to allow the coal-seam gas companies’ projects to be taxed under an adapted version of the petroleum resource rent tax, which has governed Australian offshore oil and gas projects since the 1980s.

While the PRRT carries the same 40 per cent tax rate as the government’s contentious resource super profits tax, it has more generous ­uplift rates before it applies.

A PRRT-style tax would allow companies to recoup their full capital costs before they had to pay the tax, as opposed to the RSPT, where companies would have to depreciate their capital costs over the life of the project and pay the tax immediately.

By being able to recoup sunk capital costs up front, companies would be able to pay off debts earlier and significantly reduce the cost of ­financing projects.

And a PRRT would ensure coal- seam gas projects were subject to the same tax regime as offshore energy projects, creating a level playing field in the industry.

Coal-seam gas projects involving
Santos
,
Origin Energy
and England’s BG Group have been targeting final investment decisions as early as this year, although the tax debate has caused uncertainty.

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If a PRRT model is adopted, analysts believe the projects – which represent potential investments of tens of billions of dollars each – could be approved for development relatively quickly.

Macquarie Research analyst Adrian Woodsaid a PRRT for the sector made “complete sense", as it was already well understood, not just by oil and gas companies but also by their existing and potential customers. While coal-seam gas companies would “take a hit" under a PRRT, the damage would be much less than that from the RSPT.

“It’s definitely a workable compromise," Mr Wood said. “Buyers understand and know the PRRT; it’s an ­established regime, so you don’t have to wait for the dust to settle and iron out the details."

Buru Energy
executive director
Eric Streitberg
, who is also on the board of the Australian Petroleum Production and Exploration Association, said the PRRT was “the lesser of two evils".

“We’re not welcoming any change to the tax regime, but if there is going to be one, we’d prefer it to be a PRRT," he said.

“It’s been a long, hard 20-year battle to get the PRRT into a form that works reasonably effectively, and we’d be hoping any extension of the PRRT would keep those principles."

Full details of the tax compromise are unknown, though some sources suggest the 40 per cent rate could be lowered.

There is also uncertainty about the treatment of state royalties on production, with the government having pledged to reimburse miners for their royalty payments. The sometimes lengthy window between a project coming into production and having to pay PRRT taxes could lead to the federal government reimbursing state royalties for years before it starts receiving tax revenue.

There have been suggestions the government could allow companies to add incurred royalties to the capital costs that can be claimed before the PRRT tax applies, while other sources suggested state governments could strike a deal to scrap royalties in favour of an annual payment from the federal government.